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GeoPark Ltd (NYSE:GPRK)
Q3 2020 Earnings Call
Nov 5, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the GeoPark Limited conference call following the results announcement for the third quarter ended September 30, 2020 and the 2021 work program and investment guideline. [Operator Instructions] If you do not have a copy of the press release, it is available at the Investor Support section on the company's corporate website at www.geo-park.com. A replay of today's call may be accessed through this webcast in the Investor Support section of the GeoPark corporate website.

Before we continue, please note that certain statements contained in the results press release and on this conference call are forward-looking statements rather than historical facts and are subject to risks and uncertainties that could cause actual results to differ materially from those described. With respect to such forward-looking statements, the company seeks protections afforded by the Private Securities Litigation Reform Act of 1995. These risks include a variety of factors, including competitive developments and risk factors listed from time to time in the company's SEC reports and public releases.

Those lists are intended to identify certain principal factors that could cause actual results to differ materially from those described in the forward-looking statements but are not intended to represent a complete list of the company's business. All financial figures included herein were prepared in accordance with the IFRS and are stated in U.S. dollars, unless otherwise noted. Reserves figures correspond to PRMS standards. On the call today from GeoPark is James F. Park, Chief Executive Officer; Andres Ocampo, Chief Financial Officer; Martin Torrado, Director of Operations; and Stacy Steimel, Shareholder Value Director.

And now I'll turn the call over to Mr. James Park. Mr. Park, you may begin.

James F. Park -- Chief Executive Officer

Thank you, and welcome, everyone. We are joining you this morning with our executive team reunited in Bogota, Colombia to report on our third quarter 2020 results, introduce our work and investment program for 2021 and highlight our steps to return more value to shareholders. When we founded GeoPark in 2002, we set out to build a company for the long term that would be the premier Latin American oil and gas independent and capture the big energy opportunity prize in this region. I want to always express our gratitude to the women and men of GeoPark past and present, who have made this company what it is today and created an unparalleled track record, a track record that incredibly, despite this monster storm we are fighting, is on target for our 18th straight year of growth.

We had a great start to this year in the first quarter with the acquisition of Amerisur, which significantly advanced our quietly effective Llanos Basin expansion effort, which has now positioned us with 1.4 million prime acres surrounding Llanos 34. This has made us one of the leading landholders in one of the world's most attractive onshore hydrocarbon basin and secured us with a powerful, low risk, short, medium and long-term growth fairway. During the wild and turbulent second quarter, our team moved decisively and significantly on all fronts: first, to keep our teams safe and healthy and then pulling in our horns hard and dropping our capital investment program by 80% and attacking each and every cost line to achieve nearly $300 million of future cost savings. This quickness and agility allowed us to then reengage and get back to work smoothly during a more stable third quarter, meaning putting rigs back to work and opening up temporarily shut-in production.

Our unique low breakeven production base, coupled with our relentless cost-cutting efforts, which again resulted in big declines of over 30% in operating costs and 30% in G&A and G&G costs during the third quarter generated a doubling of our second quarter EBITDA to $56 million. Our forceful cash preservation efforts maintained a healthy cash balance of $164 million, which is even more cash than what we started the year with. Operationally, we resumed drilling on the Llanos 34 block and significantly began drilling on the CPO-5 block to appraise the Indico oilfield. We have high expectations of the CPO-5 block with its combination of development opportunities and very large multiplay exploration prospects and see it as a key component of our continuing Llanos Basin growth story.

Taking advantage of the downturn, we worked to transform GeoPark into an even better and stronger company. This included a major restructuring of our project portfolio from a country or regional perspective to an asset-focused approach, which allowed us to capture large savings through synergies and improved efficiency. As always, the underlying foundation for GeoPark's performance is our in-house integrated value ESG+ program we call SPEED. This program was a founding element of our company and one of our prime accomplishments, always pushing us to be the employer of choice, partner of choice and neighbor of choice. This has been especially evident during the pandemic with our success in keeping our teams safe and healthy and assisting our neighboring communities with medical and economic aid.

So today, from a position of strength, we are finishing another successful year and have been able to build an attractive work program for 2021 to grow our company and return cash to our shareholders. Turbulence has been an opportunity zone for us throughout our history, and we are heading into 2021 with confidence and optimism. Our projected work program using a base case assumption of $40 to $45 Brent provides for $100 million to $120 million to drill 31 to 34 wells, approximately 65% development and 35% exploration with an average annual production of 40,000 to 42,000 barrels per day and generating an operating netback of $210 million to $280 million. And there's in every program, every year, we have built in our flexibility with a fully funded high case at Brent over $50 and a fully funded low case at Brent below $35, focusing on the lowest-risk projects that can yield attractive returns.

Overall, 90% of our production is cash flow positive between $20 to $30 Brent. One year ago, in our November 2019 conference call, we said, "we believe that a company that can consistently execute, invest, find oil, grow and return value back to its shareholders, all funded by its own cash flow is the run model for our industry today. In a volatile world, being able to deliver on all these fronts is the true measure of a company's durability and value." we did not know at that time that we're about to face the biggest collapse in our industry's history. But GeoPark's ability to prevail, continue growing, provide cash back to its shareholders and maintain a strong and secure financial position during this time is a powerful test of our resilience and enduring value.

Thank you, and we would be pleased to answer any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Alejandro Demichelis of Nau Securities.

Alejandro Demichelis -- Nau Securities -- Analyst

Yes. Good afternoon, gentlemen. Congratulations on the quarter on the cash returns. A couple of questions, please. The first one is on your production guidance for next year, which is effectively flat from where you are today despite you spending $100 million, $120 million in capex. So could you please give us some kind of indications of what are the moving parts to keep that kind of production flat? And then the second question, I think in your press release, you indicate that there could be some more kind of cost efficiencies to come. So trying to understand where are those cost efficiencies coming from and how large this could be?

Andres Ocampo -- Chief Financial Officer

Hi. Good morning, Alejandro, thank you for your questions. On the first question with respect to the production outlook for 2021, I would take into consideration, first, the fact that we're projecting our budget around $40 Brent, which is a little bit -- still a little bit lower than the average of 2020. So additionally, we are -- actually, we are being able to keep two full-time rigs in our core asset in Llanos 34. And as we also mentioned in the release, we were finally able to resume activities in CPO-5. So having two full-time rates in Llanos 34, we'll probably keep the production there more or less flat to a moderate growth. If you remember, at the end of '19, we will [Indecipherable] program for 2020, and we were targeting to grow between 5% to 10%, but having at least three full-time drilling rigs in the area. So I would say with this level of activity, it's reasonable that we are keeping the production between flat to a moderate growth.

Additionally, I'm sorry -- but on top of that, I would highlight the fact that the cash flow that is going to be generated by Llanos is going to be very significant. So if you think probably in Llanos 34, we're allocating something like $50 million to $60 million worth of development capex. And at a $40 Brent -- $40, $45 Brent, the asset would be generating something between $200 million to $230 million of operating netback. Additionally, on the consolidated budget [Technical Issues] and then with respect to your question about cost efficiencies, we went through a big restructuring during 2020. We reshaped the organization completely and the way we are going to [Indecipherable] ourselves. We're shutting some offices, and we reduced some of the other offices. And we also made some changes in our operations to continue reducing our costs. So -- and as well as in -- on top of that, our transportation cost also has been -- we have been able to bring it down. So all of those are for us an ongoing continuous effort. So our expectation is to keep making single in [Indecipherable] combine or a next year than for us. [Indecipherable]

Alejandro Demichelis -- Nau Securities -- Analyst

That's very good. Thank you.

Operator

Your next question comes from the line of Stephane Foucaud of Auctus.

Stephane Foucaud -- Auctus -- Analyst

Yes. Good morning, guys. Thanks for taking the questions. I've got three. The first one is around the special dividend. So I understand the logic of the quarter dividend to return to show return to shareholders and the buyback. But what was the logic behind -- the strategy behind the one-off, the extra cash dividend given specifically this quarter on top of the quarterly? That's my first question. My second question is around the tax in Colombia, the cash tax. Given the repayment and the discussion that you had in Colombia, where would you see now the cash tax or tax repayment for 2020? Where would you see 2021? And my last question is around CPO-5. It's back bidding on the previous question. Could you come back to the production you would expect from CPO-5 in the guidance in 2021. I think it's 15,000 probably a working interest. But if it's the case, compared to where we are today, what are the moving parts of 50,000 barrels per day at the moment? If CPO-5 goes up, then what goes down? Thank you.

Andres Ocampo -- Chief Financial Officer

Thank you. Great. Stephane. Thank you for your questions. On the dividend, the dividend question -- the basic logic behind it and the one-off and the ordinary dividend, we paid at the beginning of -- sorry, maybe I should step back to 2019. We started our dividend in late 2019. We were paying $2.5 million a quarter. I was hitting you more or less something like $10 million a year if we were to continue that payment every quarter. That back then would have represented something around 1% dividend yield for the company as a whole. So post COVID with oil prices dropped and our market at dropping in line, today, even though we paid $2.5 million dividend in the first quarter, if we top that up with another $2.5 million dividend on this quarter, that gives $5 million for the year, which more or less respects the same 1% yield or a little bit above that. So and the reason why it's split, it is because the ordinary dividend, obviously, is not one and obviously the well reiterate after quarters [Indecipherable] going forward.

So -- and that would give you more or less $5 million over the course of one year if we were to decide to maintain it. So that's more or less the logic on why we decided those amounts. With respect to your question about cash taxes, we -- in 2020, there was a combination of tax reductions, tax deferrals and tax reimbursements. A net impact on cash of the tax in -- of the tax payments in 2020 is going to be around $10 million. Part of that was a deferral to 2021. Roughly $20 million to $25 million were deferred to 2021. So that is going to be part of the 2021 tax deal. And then our 2021 tax estimation, cash tax estimation is somewhere around also $20 million to $25 million. So in total, the tax cash payment in 2021 should be something around 40 to 45 -- sorry, $40 million to $50 million more or less. And then your last question was about CPO-5 and the production guidance?

Stephane Foucaud -- Auctus -- Analyst

Yes.

Andres Ocampo -- Chief Financial Officer

So the numbers I gave, 7,000, 8,000 last -- this year to 15 -- more or less 15,000 next year. But obviously gross production is seen at the working interest. So how that breaks down into our production base is more or less CPO-5 growing on 34 fairly flat to a small growth, zero to 5% growth, and then the decline comes from the other assets, mainly at [Indecipherable] and to a lesser extent, some of our Argentinian, Chilean and Brazilian production.

Stephane Foucaud -- Auctus -- Analyst

Thank you.

Operator

Your next question comes from the line of Ricardo Rezende of JPMorgan.

Ricardo Rezende -- JPMorgan -- Analyst

Can you hear me?

James F. Park -- Chief Executive Officer

Yes, we can hear you, Ricardo.

Ricardo Rezende -- JPMorgan -- Analyst

Thanks for taking my questions. A couple questions on my side. The first one is related to your 2021 work program and more specifically about CPO-5, almost like a follow up on what you just mentioned. Just curious to see how were the discussions with our partner there, given that's the first year that you've been part of the controlling group of CPO-5? And how much of the synergy that you had witnessed 34 and the best practice that you had there? If you could already start to deploy that in CPO-5 in 2021? And then on the second question is this morning, petro, which is a partner on [Indecipherable], they announced they're selling their 10% stake on that block in Brazil. I'm just curious to see what are your plans there given that the three partners on that block have already mentioned their intention to sell their stakes at some point earlier this year.

Andres Ocampo -- Chief Financial Officer

Thank you, Ricardo. Good morning. With respect to your question about CPO-5, I think, so far, so good. We have a long relationship with ONGC and have been working with them in the area. We have been working before CPO-5 in jointly looking at opportunities in Latin America and particularly in the Llanos Basin. So they are open and welcoming our joining CPO-5 and have a very good partnership with them. We are very happy that we finally got a rig on site in Indico. And we are -- we're just finishing drilling Indico two well. We are expecting to perforate and test this well in the coming days. So that's great news. And we are also looking to a good drilling campaign following Indico two that has been agreed between the two partners.

So I would say the relationship has been excellent. They welcome all of our input with respect of ideas and considerations on experience we've had in Llanos 34. And the fact that we are back drilling and hopefully keeping the rig in the area to continue drilling after Indico two, the rig is going to move to an exploration prospect called [Indecipherable], and then after that is going to continue drilling, probably coming back to Indico for more development wells. So long answer, but really, our experience so far has been quite positive, and we're very optimistic about this very attractive acreage position. And then with respect to your question about PetroRio and Manati, we read that announcement, and we know of this initiative that is going around Manati. It is one of the assets. It is -- Manati is a very attractive gas field in Brazil.

It is -- it does have limited upside, so it would be part of one of the assets in our portfolio that for us would be a divestiture could be considered. And we've analyzed the idea many times, and if anything comes to reality, we will make the appropriate announcements and we will update the market on any advances on that front. So there's not a lot much that I can say about that, but it is an idea that we're happy to consider.

Ricardo Rezende -- JPMorgan -- Analyst

Great. Thanks, Andres.

Andres Ocampo -- Chief Financial Officer

Thanks, Ricardo.

Operator

Our next question comes from the line of Robin Haworth of Stifel.

Robin Haworth -- Stifel -- Analyst

Hi, Andres. So just on buybacks, is your buyback capped by free cash flow in 2021? Or would you consider using cash on the balance sheet in excess of free cash flow? Just looking at the -- my estimates of free cash flow, I don't think there's tons given your spending guidance today. So I was just wondering if you would essentially spend balance sheet cash on buying back stock here. And then how do you think about buying back stock versus doing more drilling either Llanos 34 or CPO-5? And then just another follow up on CPO-5 production rates, about 15,000 barrels a day you mentioned, is that an exit rate for 2021? Or I think you'd be quite a good effort to make that 2021 average. If you could clear that up, that would be good.

Martin Terrado -- Director of Operations

Good morning. This is Martin Torrado. I'll start with the second question related to CPO-5 production. That is the exit rate. So in addition to Mariposa one and Indico one that we have in production today, we are adding the production from Indico two and two additional development wells in 2021. And so we expect to be in the order of 12,000 to 15,000 barrels close at the end of the year.

James F. Park -- Chief Executive Officer

And there's three exploration prospects in the campaign that have no production associated that are not included in that guidance.

Martin Terrado -- Director of Operations

Correct. Neither those three nor the Agila that we're about to start drilling in the future-near future.

Andres Ocampo -- Chief Financial Officer

So on your question about using our cash for buybacks, Robin. Yes, we would use some of our cash. The guidance more or less we gave this morning is more or less cash neutral at the asset -- I mean, after asset debt service, taxes and everything. So we know that we have dividends and buybacks and any other non-asset or not inside company-related items. And for that, we could definitely use our cash. At these prices, we believe it's a great investment as well. We also have to take into consideration our balance sheet management and keeping the cash also help us to maintain a strong balance sheet. So we will not get our eye from that part. But given that we believe we have a pretty solid financial position in 2021 and a pretty solid and healthy cash inflow and cash position, yes, we will definitely use some of our cash to invest in buying back so much of our shares.

Robin Haworth -- Stifel -- Analyst

Great. Thank you. So just, I guess, to follow up on that. Are you sort of committing to use the full 10% ability to buy back stock? Or is it more opportunistic than that?

Andres Ocampo -- Chief Financial Officer

No, we're not committing to use up the full 10%. We'd be more opportunistic and it will depend really on market conditions generally. But -- so that's the maximum allowance that we have approved, but we will not commit to use the full amount.

Robin Haworth -- Stifel -- Analyst

Right. Thank you very much.

Operator

[Operator Instructions] Your next question comes from the line of Johanna Castro of Itau.

Johanna Castro -- Itau -- Analyst

Hi thank you for taking my questions. I had one strategic question on the rationale on how you see the beginning of next quarter, because I think that you probably are one of the companies that have-give more guidance quarter-over-quarter about what is your capex every time more changes. So it is good that you give that insight, but I was thinking -- I was actually willing to understand what is your rationale on the market and your negotiation with Rapid in the first quarter of 2021. If you can disclose a little bit on how you're looking at that overview of the market in Colombia? That is the most relevant for you. And the second question is more an accounting issue for the end of this year. If the results continue to be similar in fourth quarter to the third quarter, you will run into negative equity. Are you planning to avoid that scenario just for the matter of results presentation? Or it doesn't really matter to the group.

Andres Ocampo -- Chief Financial Officer

Hi, good morning, Johanna, could you please repeat the first question? I'm not sure I understood your question, please.

Johanna Castro -- Itau -- Analyst

It's that you have used several times in the past some anticipated net -- yes, commercial figures with Trafigura in order to anticipate on sales and as I have understood that we will work in case of the need of liquidities. But I don't know if you are in that scenario for the first quarter of 2021. If you are using that kind of a strategy in order to anticipate some sales of the production, I was just wondering if that is a scenario for the first quarter 2021.

Andres Ocampo -- Chief Financial Officer

Okay. So basically, what happened this year is we negotiated an agreement with Trafigura to implement another prepaid facility. And in exchange of that, have an uptake contract with them. So they will be taking part of our production during next year and the following year. So that agreement is still in place, and we have the commitment from Trafigura to diverse if we would require we have $50 million of available liquidity committed to us that has to be expanded to $75 million. I confirm that none of these amounts have been withdrawn, so the line is unused. And we expect to keep that in place also for the next year. And then as a result of that, you will see part of our volumes being sold to Potiguar in 2021, no. I don't know if that is to the point that it addresses the question that you are making.

Johanna Castro -- Itau -- Analyst

Yes. Perfect.

Andres Ocampo -- Chief Financial Officer

Thank you. And then your next question on the...

Johanna Castro -- Itau -- Analyst

But on the second -- yes.

Andres Ocampo -- Chief Financial Officer

Yes? To your point, we'll see results in the fourth quarter. But if it happens, as you said, there is a chance that our net equity becomes negative during the fourth quarter. We don't really see that as a concern. That's purely an accounting rule matter. And the main explanation for that is that you can see that a very important and big asset like Llanos 34 is booked in our balance sheet at a book value of $200 million. And that follows simply accounting rule that we need to follow, which is booking our assets taking into consideration on the past investments minus depreciation following production. So the book value of the equity as a result of those accounting rules which really do not reflect fairly what we believe is the real underlying value of the assets. I mean Llanos 34 is going to generate that much in the next 12 months.

So for that reason, we don't see this as a concern. We have a very solid cash position. We have just announced a preterm and robust work program and budget that is going to generate a lot of cash flow for our company. So we don't really think it is an issue. And also, there has been a lot of companies, this is not an unusual event. I mean there's many companies, not only on the E&P sector, but in other sectors that experienced negative with no real issue. So this is not for us an issue that reflects anything with respect to our business.

Johanna Castro -- Itau -- Analyst

Okay. Thank you for the clarification.

Operator

Our next question is a follow up from Alejandro Demichelis of Nau Securities.

Alejandro Demichelis -- Nau Securities -- Analyst

Yes. Guys, just to follow up on something that Martin said on CPO-5. Can you confirm that you are taking Indico two into production? And because on your press release, I can see your comment on any kind of early kind of indications for Indico two. So maybe you can tell us how you're seeing the progress there maybe already in the reservoir.

Andres Ocampo -- Chief Financial Officer

Yes. So we're very excited. Indecipherable that we got a rig operating there. We're aligned with our partner. The Indico two well was started in September. targeting the Une formation is the same formation that's been producing in both Mariposa and Indico one. And as we speak, the operator of GC is completing the well. We're excited. And shortly, we will be communicating those results. Following that Indico two completion, the rig is moving to the Agila, and that is also targeting the Une formation. So we expect to have results to share with you shortly.

Alejandro Demichelis -- Nau Securities -- Analyst

But surely, if you're completing a well, it's because you have a discovery, yes?

Andres Ocampo -- Chief Financial Officer

So we are casing the well, and the results, they look good. We will -- again, we will share once we have the world with more information.

Martin Terrado -- Director of Operations

Yes, Alejandro. And just remember, Indico two is not an exploration well just for clarity. It's an appraisal well inside the Indico field. So it wouldn't qualify as a discovery. It's a development well. Our development/operation well. And hopefully, we will be starting to test the well in coming weeks. So looking forward to that.

Alejandro Demichelis -- Nau Securities -- Analyst

That's good. Thank you.

Operator

That was our final question for today. I would now like to return the call to Mr. James Park for any additional or closing comments.

James F. Park -- Chief Executive Officer

Thank you, everybody, for your interest in GeoPark and your continued support of our company. As the world's quarters begin to open again, we encourage you to please visit us at our operations in each country. Our shareholder value team has accelerated their actions and has been here than ever with webinars, video conferences and direct calls and is available around the clock as is our management team to answer any questions or listen to your comments. Thank you, and please stay healthy.

Operator

[Operator Closing Remarks]

Duration: 39 minutes

Call participants:

James F. Park -- Chief Executive Officer

Andres Ocampo -- Chief Financial Officer

Martin Terrado -- Director of Operations

Alejandro Demichelis -- Nau Securities -- Analyst

Stephane Foucaud -- Auctus -- Analyst

Ricardo Rezende -- JPMorgan -- Analyst

Robin Haworth -- Stifel -- Analyst

Johanna Castro -- Itau -- Analyst

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